The European venture capital (VC) industry finished strong in 2017 with €16.9 billion invested across 3,306 deals, the highest amount of capital deployed on record, according to PitchBook’s 2017 European Venture report. Although deal counts trended downward for the third consecutive year, median deal sizes reached a decade-high across all stages as investors increasingly targeted more developed companies commanding larger deal sizes – like, Improbable’s €458 million series B and Deliveroo’s €417 million Series F. Fast-growth sectors like Fintech and AI/ML also notably drove deal value, especially in UK/Ireland region, known as the VC backbone of Europe. Despite sliding exit counts, 2017 exit value held steady, bolstered by VC-backed IPOs, which had the strongest showing since 2014. To keep pace with ever-growing deal sizes, European VC investors have sought larger funds, as evidenced by the decade-low in fund counts while capital raised eclipsed €7 billion for the third consecutive year.

“The European VC ecosystem remains strong on all accounts as investors adapt to the rising valuations and changing market dynamics,” said Cameron Stanfill, PitchBook analyst. “Deal sizes continued to trend upward, driven in part by a maturing VC ecosystem and support from government initiatives. The ripple effects of this can be seen in the tepid exit market and fewer, larger fund vehicles. In 2018, we expect European VCs will be closely watching the outcome of Spotify’s unconventional public debut, as well as the possibility of a disruptive year for European IPOs.”

European VC Investment Bolstered by UK/Ireland Region
European venture investors deployed the highest amount of capital PitchBook has recorded (€16.9 billion), despite experiencing a 24% decline in deal counts from 2016. This activity mimics that of the U.S. venture ecosystem in 2017, whereby investors completed fewer deals, yet deployed larger amounts of capital into more mature companies. The number of angel and seed rounds completed in Europe declined by 39% from 2016. Meanwhile, more than half the capital invested in 2017 was in deals larger than €25 million, a segment which saw a 35% YoY deal count increase in 2017. Europe’s VC stronghold – UK/Ireland – also played a key role in boosting deal sizes, aided by government initiatives and the maturing VC ecosystem. The region saw a record volume and count of large deals – over €4 billion invested in 53 rounds greater than €25 million. An increasingly popular sector for European VC in 2017 was artificial intelligence and machine learning as technologists continued to surface new applications for everyday life and paved the way for further advancement of the field. Annual VC investment in AI/ML topped €1 billion for the first time and deal count saw 30x growth over the past decade.

Healthy Exit Market Buoyed by IPOs
Overall, exit activity declined in 2017 but remained healthy on historical basis, despite the absence of mega-deals. Last year, there were €11.6 billion in capital exited across 426 deals, down from €12.6 billion exited across 471 deals in 2016. Even with lower exit counts, the healthy exit value suggests a stabilization of the market around a new standard of exit value. After a slow start, 2017 proved to be a renaissance year for VC-backed IPOs, raising over €3 billion across 53 offerings. Boosted by larger offerings of aging unicorns, Delivery Hero (€865.7 million) and Rovio (€424.61 million), 2017 was the strongest showing of public debuts since 2014, which holds the decade-high record for both IPO value and count—€5.2 billion across 79 IPOs. Looking ahead, Spotify’s pursuit of a direct listing is expected to shake up Europe’s IPO market in 2018. If the Swedish music steaming giant can achieve a successful public debut, it may forge a new exit path for other large late-stage companies.

VC Fundraising Remains Strong on a Capital Basis, Despite the Fund Count Hitting a Decade-Low
2017 represents the third consecutive year of over €7 billion in capital raised, yet a decade-low for fund counts (54). While fundraising remains strong, the number of vehicles declined 25% YoY and 2017 marks the sixth consecutive year fund counts trended downward. The slower pace of fundraising reflects the new venture market dynamics, whereby investors raise fewer, larger funds to keep pace with demand for larger deal sizes and follow-on financing. In 2017, micro-funds shrunk to 19% of total VC funds, down from 49% in 2014. Meanwhile, 62% of VC funds raised were between €50 million– €250 million. This trend is also spurred by LP’s desire to consolidate across fewer fund managers to reduce fees and streamline portfolio management.